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Healthy expansion in the scale of operations and robust profitability to continue

* Adani Ports & SEZ (APSEZ) ended FY24 on a strong note with >20% volume growth. The outlook remains bright, and growth momentum is likely to sustain as APSEZ continues to gain market share from other operators and grow at twice the industry growth rate.

* APSEZ invested significantly in FY24 to expand its portfolio, cementing its position as India’s largest private port player and integrated logistics provider. The company strengthened its presence on the eastern coast by inking a definitive agreement to acquire a 95% stake in Gopalpur Port. The port has a capacity to handle 20 MMTPA.

* APSEZ successfully scaled up its operations at Karaikal Port and commenced commercial operations at the Dhamra LNG Terminal. Additionally, its Haldia terminal is expected to be operational in FY26.

* APSEZ’s upcoming deep-water international seaport in Vizhinjam (expected to be operational by 2QFY25), being developed through a public-private partnership, will transform maritime trade for India, handling ultra-large ships and diverting traffic from the Colombo Port.

* APSEZ, as an integrated transport utility company, has built up its logistics assets base, comprising trains, multi-modal logistics parks (MMLPs), rail tracks, warehousing, and an inland container depot, thus building operational synergies. This one-stop solution service has led to a robust volume CAGR of 15% over FY19-FY24 vs. 4% CAGR only for all India ports. We expect APSEZ to record an 11% volume growth and a revenue/EBITDA/PAT CAGR of 14%/ 15%/19% over FY24-26. Driven by consistent outperformance in cargo volumes, we reiterate our BUY rating with a revised TP of INR1,700.

Robust operating efficiency and diversified coast parity

* The company’s overall cargo volumes grew to 420MMT in FY24 from 208MMT in FY19, at a 15% CAGR, compared to 4% CAGR for all India ports. In FY24, APSEZ's domestic cargo volumes rose 21% YoY, outperforming India's 7.5% growth due to higher volumes at older ports and ramp-up in the recently acquired ports.

* The cargo concentration from Mundra port has steadily reduced to 43% in FY24 from 66% in FY19, due to the east coast-west coast parity. The diversification has helped APSEZ outperform the industry sustainably.

* While volume growth in the first two months of FY25 has been slow due to the suspended operations at Gangavaram, operations have now resumed. From Jun’24, volume growth is expected to normalize.

* The large land banks at Mundra, Dhamra, and Krishnapatnam enhance the prospects for industrial monetization. The government’s initiatives in multimodal logistics, improved rail coefficient, and rising coastal movement are expected to boost APSEZ’s growth.

* APSEZ targets cargo volumes of 460-480 MMT in FY25. This would be driven by a ramp-up of newly acquired ports and higher utilization of existing ports. APSEZ sees a minimal impact of the Red Sea crisis on its cargo volumes.

Transshipment port/terminal to be operational in FY25

* APSEZ is developing a greenfield transshipment container port at Vizhinjam, Kerala, with an initial capacity of 1m TEUs in the first phase, at an estimated cost of ~INR58b. The project was delayed due to multiple factors, including the shortage of rock for breakwater construction, Covid-related disruptions, and cyclones. The project is now likely to be operational by 2QFY25.

* APSEZ is also developing a container terminal in Colombo, Sri Lanka, with a capacity of 3.5m TEUs in a JV with John Keels (34% stake), a local private company, and the Sri Lanka Port Authority (15% stake). The total project cost is around USD 800m.

* In Nov’23, the Sri Lanka project received a sanction of USD553m from the US Development Finance Corporation (US DFC). This investment is a strategic step towards bolstering Sri Lanka’s economic recovery through private sector-led initiatives. The first phase of the project is likely to be operational by Dec’24.

Building infrastructure for strong future growth in the logistics business

* As APSEZ embarks on becoming India's largest integrated transport utility company by 2030, it is strengthening its capabilities in all logistics segments (ports, CTO, warehousing, last-mile delivery, ICDs, etc.). Hence, it offers end-toend service to its customers, thereby capturing a higher wallet share and also making the cargo sticky in nature.

* During FY24, APSEZ initiated a trucking business segment, deploying 900 trucks to offer last-mile connectivity for customers from ports, inland container depots (ICDs), and customer premises.

* The company currently operates 12 multi-modal logistics parks (MMLPs), equipped with 127 trains, 2.4m sq. ft. of warehousing space, and 1.2mmt of grain silos. It plans to expand its footprint and build a pan-India presence in the form of logistic parks and warehouses.

Valuation and view

* APSEZ is anticipated to outpace India's overall growth, driven by a balanced port mix along India's western and eastern coastlines and a diversified cargo mix. The company continues to invest heavily in the ports and logistics business to drive growth. The commencement of operations at transshipment hubs will enable the company to further boost volumes.

* We expect APSEZ to report 11% growth in cargo volumes over FY24-26. This would drive a CAGR of 14%/15%/19% in revenue/EBITDA/PAT over FY24-26. We reiterate our BUY rating with a revised TP of INR1,700 (premised on 19x FY26E EV/EBITDA)

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